Lender of Last Resort, Meet ‘User of Funds of Last Resort’

TOKYO–With all the talk about austerity in Europe, it was refreshing to hear a different view from Japan on the sidelines of the International Monetary Fund meetings in Tokyo.

The Japanese government has “acted as a user of funds of last resort,” Chikahisa Sumi, deputy vice minister of finance for international affairs, explained with a welcome tinge of irony.

But he wasn’t joking. Japan’s public debt has skyrocketed over the years as the government and the central bank tried to work off legacy problems stemming back to the asset bubble of more than 20 years ago. Japan’s fiscal dynamics have not been driven by any particularly extravagant spending, Mr. Sumi noted.

In fact, he said, “government spends the money that the private sector doesn’t have the appetite to spend.”

It’s a salient point. An economy is primarily the household, business and public sectors, and the sum of the three must theoretically be in balance. So if the private sector wants to save more, the government must do the opposite.

That’s not the hymn book used in Europe. There, euro-zone paymaster Germany is pressing its partners to balance their fiscal accounts in a hurry. One result has been Greece, where a whopping 19% of GDP has been sacrificed to austerity, with no meaningful relief in terms of the sovereign debt ratio.

Mr. Sumi’s point is that in Japan, the private sector generated lots of savings but didn’t have a place to put the money. Government bonds provided a destination.

Moreover, Japanese workers tend to retire at 60, five years before public-pension benefits kick in, creating an intrinsic demand by way of insurance companies for savings to tide people over that bridge. Indeed, Mr. Sumi thinks in a decade’s time there might even be a shortage of Japanese sovereign bonds.

The approach contrasts with that of euro-zone countries. Italy, for example, also has high private savings and no shortage of public debt.

“But with the euro, Italy no longer is the only seller of the investment vehicle Italians naturally want,” Mr. Sumi said in an interview, noting that German and French bonds are considered safer.

To be sure, there’s one big difference. Japan runs a hefty current-account surplus. So does Germany, but not Italy and its cousins in the euro-zone periphery.

But then, Japan’s external surplus is hardly the product of its fiscal policy, which as Mr. Sumi notes is actually its counterpoint.